Walker signs off on state budget

Gov. Bill Walker signed the state budget into law Wednesday, June 13, along with a bill passed by the Legislature that allows Permanent Fund earnings to be used to help pay for the budget, a landmark in state fiscal policy because it diversifies revenues for the first time in four decades, when oil production started on the North Slope.

Previously, oil and gas revenues paid for most of the budget, but those are volatile. Walker, and the Legislature, felt that using some earnings of the $64 billion Permanent Fund would stabilize the state’s finances.

Bond rating agencies seem to agree. The ink had hardly dried on Walker’s signature on Senate Bill 26, the bill authorizing use of Fund earnings, when Standard and Poor’s Global Ratings upgraded the state’s credit rating and revised its outlook for Alaska from negative to stable.

The upgrade applies to state General Obligation debt, now rated AA, up from A, as well as the state municipal bond bank, and indirectly affects the bond ratings of most Alaska municipalities, including those in the Matanuska-Susitna Borough, because they are heavily dependent on state revenues.

The outlook revision is the first significant positive news from one of the major credit rating agencies since Alaska’s latest fiscal crisis began in 2015. S&P, Moody’s and Fitch, the three major rating agencies, all downgraded the ratings on Alaska debt in response to the Legislature’s gridlock over how to solve the huge budget deficits created when oil prices collapsed in late 2015.

Credit ratings provide independent, objective analyses of the state’s credit worthiness. They help investors decide whether to invest in Alaska bond offerings, and determine the price of borrowing, which is reflected in the interest rate on the debt.

“It is our opinion that the adopted legislation (SB 26) that outlines a percent of market value approach to use its Permanent Fund earnings reserve show allow for sustainable draws from the fund in future budgets,” S&P credit analyst Timothy Little said in a statement.

“This is independent confirmation that we’ve turned the corner,” in tackling the state’s financial problems, Walker said. “There is still work to do, but I thank every member of the Legislature who took bold action to steer our state back onto a responsible fiscal path,” the governor said.

However, the budget deficit hasn’t been entirely erased. It is projected at $700 million for Fiscal Year 2019, the budget year beginning July 1. But that’s a vast improvement the $3.7 billion deficit the state faced in FY 2018. Had SB 26 not passed the state would have a FY 2019 deficit of about $2.4 billion, which would have essentially depleted funds in the Constitutional Budget Reserve, the state’s main liquid cash reserve.

Senate Bill 26, which the governor signed, allows for an annual percent-of-market-value draw on the Fund’s earnings. But there is still an instability built into the system, so the fiscal restructuring is not yet done.

Under SB 26 an amount will be drawn under the POMV that will fund both the state budget and the annual Permanent Fund dividend. The Legislature will have to decide how much goes to the budget and how much goes to PFDs.

This will be an interesting debate every year, especially given certain built-in upward pressures on the budgets, such as health care costs.

Also, the percent rate on the annual Permanent Fund earnings draw set now in statute, which is 5.25 percent currently and dropping to 5 percent in three years, can also be ignored by the Legislature.

If funds are tight, there’s nothing blocking lawmakers from using a 6 percent or 7 percent draw. The only pressures against that would be a governor using his or her veto authority and the public.

In terms of the overall budget, the FY 2019 undesignated general fund total is about $4.7 billion including state operations and capital spending, according to the state Office of Management and Budget.

When the money needed to pay for the $1,600 PFD for this year is added, the total increases to $5.7 billion.

Walker and several legislators have said that more changes to the state’s finances are needed because SB 26 doesn’t cover the entire budget gap, with a $700 million deficit remaining.

At some point, a new revenue source, such as a state income tax or sales tax will likely be needed.